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Bennett T. McCallum
The likelihood of the Bitcoin system replacing the Federal
Reserve as the main provider of money in the United States and the
desirability of such a transformation are the topics of this article.1
With respect to the first of these topics, one needs to consider how
far the so-called Bitcoin Revolution has progressed by estimating the
average volume of transactions conducted per time period by means
of Bitcoin payments, and then compare recent values of that magni-
tude with the total volume per period of dollar payments in the
United States.2
Francois Velde of the Federal Reserve Bank of Chicago has
estimated that, as of late 2013, the average volume of bitcoin trans-
actions per minute totaled less than four-tenths of 1 percent of
average dollar transactions per minute—actually, not total dollar
transactions but only the subset conducted by means of Visa credit
card payments (Velde 2013). In the months since the publication
of Velde’s article the volume of bitcoin payments has been grow-
ing rapidly, but their quantitative extent is still negligible from a
macroeconomic perspective. In fact, this 0.004 magnitude is quite
Cato Journal, Vol. 35, No. 2 (Spring/Summer 2015). Copyright © Cato Institute.
All rights reserved.
Bennett T. McCallum is H.J. Heinz Professor of Economics at Carnegie Mellon
University. He thanks Pierre Liang, Marvin Goodfriend, and Christopher Camp for
helpful comments and suggestions.
1
I have not attempted to explain the workings of the Bitcoin system in this article
because it would require space and because I could not do this better than Velde
(2013).
2
In what follows, I will use “Bitcoin” as the name of the system, “bitcoin” as an
adjective or a singular noun, and “bitcoins” to refer to specified quantities.
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Cato Journal
3
See, for example, Jevons (1875: 13–18), Wicksell (1935: 6–7), and Clower (1967: 4–5)
4
This semantic point has been made by Niehans (1978: 118), McCallum (1989: 17),
and White (1999: 7)
5
These figures came from: www.federalreserve.gov/releases/z1/current/z1r-5.pdf.
6
That the medium-of-exchange property is the essential one is mentioned by
Wicksell (1935: 7), Clower (1967: 4), and (implicitly) Jevons (1875: 13–18).
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Bitcoin Revolution
Anonymity
Before proceeding, it should be mentioned that, as a novice to the
Bitcoin world, I have found it confusing that some experts tout
anonymity as a great advantage of Bitcoin over other payment sys-
tems while other, also qualified, experts—e.g., Spear (2014)—state
that anonymity is not a feature at all. Apparently, however, both are
correct but have in mind anonymity in two quite different respects.
One is whether it is possible to follow the transactions of an individ-
ual Bitcoin user. Since all transactions are recorded and retained in
the system’s “block chain,” which is a public ledger, there is no
anonymity at all of this nature. The public ledger does not, however,
associate a particular Bitcoin transactor with any specific person (or
group of persons). It might be possible, therefore, for an individual
to keep secret his ownership of his bitcoin account. A useful brief
statement on this topic by Grinberg (2011: 179) is: “All Bitcoin
transactions are public, but are considered anonymous because
nothing ties individuals or organizations to the accounts that are
identified in the transactions.” Velde (2013: 3) puts this in another
way as follows: “The many ingenious features of bitcoin try to emu-
late . . . properties of cash, but do so at some costs. One prominent
cost is the loss of anonymity. Possession of the virtual currency
7
For a reasonably optimistic outlook, and suggestions for improving it, see Luther
and White (2014).
8
For an analytically impressive argument to the contrary, see Selgin (2013).
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9
See, e.g., Selgin (2013: 21) and Grinberg (2011: 175–76).9 A member of the Bitcoin
development team has indicated to me that the process for changing the code is
more difficult than the foregoing discussion implies. What a member (or, in fact,
anyone) actually can do is to submit a proposal for changing the code. Any such pro-
posal is then reviewed by all interested members of the Bitcoin community. If a pro-
posed change would have the effect of changing the path of the Bitcoin supply, it
would amount to a “hard fork” that would entail the existence of two different ver-
sions of the Bitcoin code. Then if all users adopted the proposal, the change would
be incorporated. If they did not, then the result would be two competing versions of
Bitcoin—in which case its market value might be endangered. Accordingly, all
Bitcoin holders would have, he suggests, a strong incentive not to adopt the proposal.
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10
The usual reference is Friedman (1969) but that article’s basic argument was
developed much earlier, in Friedman (1960: 73). Selgin (1995) has suggested that
that Friedman’s analysis “superficially resembles arguments for the productivity
norm” which Selgin has championed.
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Bitcoin Revolution
10, for the nation’s monetary system to be based on gold and/or sil-
ver.11 Since there is nothing in the existing Amendments that suggests
any change in this arrangement, it is clear that the inconsistency of
today’s reality with the Constitution’s specification is severe—and
that it can be traced to Supreme Court rulings in the 1871 cases of
Knox v. Lee and Parker v. Davis. I have written a short paper
(McCallum 2010) discussing this astonishing episode, drawing heav-
ily on several earlier writings by Richard Timberlake that are beauti-
fully and extensively developed in Constitutional Money: A Review of
The Suptreme Court’s Monetary Decisions.12
11
More precisely, it put constraints on monetary arrangements made by Congress
and the states, evidently presuming that the main monetary institutions would be
provided by Congress.
12
Timberlake (2013) argues that not only was the majority Supreme Court reason-
ing in these cases faulty, but also that there exists a possibility of reversing the Knox
v. Lee, Parker v. Davis, and Juilliard v. Greenman decisions, these themselves being
startling and fascinating reversals of the Hepburn v. Griswold decision of 1870.
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An Intriguing Possibility
In conclusion, I would like to mention an unlikely but intriguing
possibility that could arise from the existing situation. It is, that there
exists a rather prominent possibility that the U.S. government will
take legal steps to constrain or banish the Bitcoin system. In that case,
it would seem that any legal attack by the federal branch of govern-
ment on Bitcoin would have to begin by establishing the govern-
ment’s responsibility for management of the U.S. monetary system.14
13
It might be asked what one could reasonably believe would be the case if it were
not for the likelihood of government resistance to Bitcoin. To me it would never-
theless seem unlikely that Bitcoin would replace government currencies to a large
extent. If, however, I think back to the early 1990s, I would have myself never
believed that e-mail and the Internet would have taken over as large a part of my
daily activities as, in fact, they have.
14
There will be regulations at the state level—New York, for example, has been
holding hearings in preparation for the design of its version—but these will be of
a different nature than ones that would entail a challenge to the Federal Reserve
as the nation’s monetary authority.
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Bitcoin Revolution
References
Andolfatto, D. (2014) “Bitcoin and Beyond: The Possibility of Virtual
Currencies.” Federal Reserve Bank of St. Louis Dialogue with the
Fed (31 March).
Andreessen, M. (2014) “Why Bitcoin Matters.” dealbook.nytimes
.com/2014/01/21/why bitcoin Matters.
Clower, R. W. (1967) “A Reconsideration of the Microfoundations of
Monetary Theory.” Western Economic Journal 6: 1–9.
Friedman, M. (1960) A Program for Monetary Stability. New York:
Fordham University Press.
(1969) “The Optimum Quantity of Money.” In Friedman,
The Optimum Quantity of Money and Other Essays. Chicago:
Aldine.
Grinberg, R. (2011) “Bitcoin: An Innovative Alternative Digital
Currency.” Hastings Science and Technology Law Journal 4 (1):
159–207.
Jevons, W. S. (1875) Money and the Mechanism of Exchange.
London: H.S. King.
Luther, W. J., and White, L. H. (2014) “Can Bitcoin Become a Major
Currency? George Mason University, Department of Economics
Working Paper No. 14–17.
McCallum, B. T. (1989) Monetary Economies: Theory and Policy.
New York: Macmillan.
(2010) “The Future of Central Banking: A Lesson from
United States History.” Bank of Japan Monetary and Economic
Studies 28: 27–34.
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